Angel & Venture Capital Finance: Where is the Money Moving? James Geshwiler Managing Director, CommonAngels Web Innovators Group 9 December 2008

Where’s the Money?! Public Market Crash Hits Everybody “Venture Capital Hits a Cash-Call Crunch,” WSJ , 12/8 “High-tech Wrestles with credit crisis,” Boston Globe 10/8 “A lot of [VCs] could be on the sidelines for four or five years." –Boston-based general partner Most angels net worth down 30-50%

Public Market Crash Hits Everybody

“Venture Capital Hits a Cash-Call Crunch,” WSJ , 12/8

“High-tech Wrestles with credit crisis,” Boston Globe 10/8

“A lot of [VCs] could be on the sidelines for four or five years." –Boston-based general partner

Most angels net worth down 30-50%

Risk Isn’t Up that Much; Just Changed Financial risk—very high Can’t count on follow-on investment Syndication gone from tough to nearly impossible Competitive Risk—way down! Little threat from existing companies Fewer VC-backed chasers Market Risk—mixed, depends on sector, company People Risk—down; great teams, attrition down Product Risk—unchanged

Financial risk—very high

Can’t count on follow-on investment

Syndication gone from tough to nearly impossible

Competitive Risk—way down!

Little threat from existing companies

Fewer VC-backed chasers

Market Risk—mixed, depends on sector, company

People Risk—down; great teams, attrition down

Product Risk—unchanged

Working with Investors Today Target Investors who Succeed on Lower M&A High M&A, IPO closed for big exits Very hard to move the needle on a big fund Shouldn’t be Focused on Today’s Market Companies backed today targeting 5-7 years for exit Cash is King of Kings Cash-flow break even on 1 round if at all possible

Target Investors who Succeed on Lower M&A

High M&A, IPO closed for big exits

Very hard to move the needle on a big fund

Shouldn’t be Focused on Today’s Market

Companies backed today targeting 5-7 years for exit

Cash is King of Kings

Cash-flow break even on 1 round if at all possible

Working with Angels, VCs, Both? Individual “Angel” or “Private” Investor Invests own money, gets full return Typically industry veterans Venture Capitalists Compensated on fees, profit share Dedicated, institutional investor Angel Groups Large networks of industry experts Usually 2-3 with greatest skills lead + “bench” Organized, institutional structure

Individual “Angel” or “Private” Investor

Invests own money, gets full return

Typically industry veterans

Venture Capitalists

Compensated on fees, profit share

Dedicated, institutional investor

Angel Groups

Large networks of industry experts

Usually 2-3 with greatest skills lead + “bench”

Organized, institutional structure

Who are the Top Investors? Source: MIT Entrepreneurship Center & HBS Study on Angel Investing, Feb 2000 Founder, Chairman Former CEO Successful company in your or complementary sector Professional Entrepreneur Angel Financial Return Angel Low Guardian Angels Operational expertise angel High Industry Experience High Low Entrepreneurial Experience

Angel Groups Addressing Void Left by VC Stage Pre-Seed Seed/Start-Up Funding Gap between $500,000 and $5,000,000, targeting average M&A and up Early Later Source Founders, Friends and Family Individual Angels Venture Funds Investment $25,000 to $100,000 $100,000 to $500,000 $5,000,000 and up (initial capital may be smaller, but exit targets higher)

Median Fund Remains ~$200M! Source: DowJones/VentureOne Median VC Fund Size (for funds greater than $20M)

Funds < $100M Disappearing Allocation of Fund Size by Number of Funds Raised per Vintage Year Source: DowJones/VentureOne

Angels Institutionalizing ACA Formed 2004 46 Groups Charter Members As of 2008: 142 Groups 18 Affiliate Organizations >6,500 Investors 43 States & Provinces Member Locations Full Member Provisional Member

ACA Formed 2004

46 Groups Charter Members

As of 2008:

142 Groups

18 Affiliate Organizations

>6,500 Investors

43 States & Provinces

CommonAngels Target Investments Series A Financing of $500K - $5M Total Capital Less than $20M New Areas of Information Technology Current Expertise within the Membership Passionate with CEO Capabilities Within the Geographic Area – 1 Hour Travel Possibility of Liquidity Event in 5 years

Series A Financing of $500K - $5M

Total Capital Less than $20M

New Areas of Information Technology

Current Expertise within the Membership

Passionate with CEO Capabilities

Within the Geographic Area – 1 Hour Travel

Possibility of Liquidity Event in 5 years

Typical Deal Process Submissions (~30 Plans Per Month) Managing Director pre-screens emailed submissions. Screening Team Review (5 – 10 Plans Per Month) Screening team votes on which companies to invite to general meeting. General Meeting Presentations (1 – 3 Plans Per Month) Managing Director polls members for level of investment interest in deals, recruits diligence team, and facilitates selection of deal lead to begin term sheet negotiations. Manage Investment Board member represents member interests and seeks an attractive exit. Deal lead closes transaction and the sidecar fund invests in companies that attract at least $250K in investment from at least 5 members. Diligence & Term Sheet Negotiations (Coordinated by Managing Director & Deal Lead) ENTER EXIT

Who Matters More than What “ The most important item on a term sheet is the name of the investor at the top” —Mark Gorenberg, Hummer Winblad Venture Partners View Investors like any other Strategic Relationship Cash is a commodity, firms and people aren’t Long-term partners Influence of style, expertise Big Investor vs. Small Investor Incentives “ Instant Company” vs. Organic Approach 1 st round dilution matters much less than later rounds

“ The most important item on a term sheet is the name of the investor at the top” —Mark Gorenberg, Hummer Winblad Venture Partners

View Investors like any other Strategic Relationship

Cash is a commodity, firms and people aren’t

Long-term partners

Influence of style, expertise

Big Investor vs. Small Investor Incentives

“ Instant Company” vs. Organic Approach

1 st round dilution matters much less than later rounds

Big Investor Incentives >$250M in Fund >$40M/Partner >$10M/Investment >$50M Liquidity/Deal, Exits >$500M Institutional LPs Meticulously measure IRR Next fund depends on top quartile performance From Company’s Perspective Pro/con: 800lb Gorilla as your friend Technical risk OK ($ can fix that); Can’t Bring Market Risk (exit too small) Return needs to justify $30-40M+ from syndication, multiple rounds “ We Fund BIG Ideas….”

>$250M in Fund

>$40M/Partner

>$10M/Investment

>$50M Liquidity/Deal, Exits >$500M

Institutional LPs

Meticulously measure IRR

Next fund depends on top quartile performance

From Company’s Perspective

Pro/con: 800lb Gorilla as your friend

Technical risk OK ($ can fix that); Can’t Bring Market Risk (exit too small)

Return needs to justify $30-40M+ from syndication, multiple rounds

“ We Fund BIG Ideas….”

Small Investor Incentives <$100M in Fund/Network $10M/Partner or less $500K-$3M Investment $5M-20M Liquidity/Deal, Exits $50M-100M Institutional LPs, SBIC, Individuals Maybe more flexibility in performance (non-ERISA $) Maybe less, eg., SBIC program…. From Company’s Perspective Pro/con: good returns on average M&A transaction Market risk OK; technical risk bad (can be bottomless pit) Shallower pockets may be disincentive to pile on risk “ Who is going to buy you?...”

<$100M in Fund/Network

$10M/Partner or less

$500K-$3M Investment

$5M-20M Liquidity/Deal, Exits $50M-100M

Institutional LPs, SBIC, Individuals

Maybe more flexibility in performance (non-ERISA $)

Maybe less, eg., SBIC program….

From Company’s Perspective

Pro/con: good returns on average M&A transaction

Market risk OK; technical risk bad (can be bottomless pit)

Shallower pockets may be disincentive to pile on risk

“ Who is going to buy you?...”

Big vs Small Investor Incentives $ Exit Probability Big Investor (>$500M) : Has capital, incentive to push for big outcome, but can drive failure seeking bigger exit Small Investor (<$200M) : Has capital to avoid failure, incentive to sell earlier for similar IRR Courtesy Dharmesh Shah, founder Hubspot

Textbook Case Studies of Incentives SOFTWARE (Web 2.0) Medical Devices (Orthopedics, Non-invasive) Likely Clash: Small return for opportunity cost, incentives to dream big, assume more risk Low Likely Clash: Run out of money, cramdown, premature sale BIOTECH (drug discovery) CLASSIC TELECOM (routers, CLECs) High Company Capital Requirements Small Large Fund Size

“Instant Company” vs. Organic Approach Timelines, Competition Also Key Variables Some Opportunities Require Big Money Up Front Taking on public company Making a market Need critical mass for audience Large capital requirement to finish R&D, prove concept, build infrastructure Analogy: launching a rocket…you get there fast! But aim correctly! Others Are Better Done in Stages Greenfield opportunity with barriers to entry Multiple market opportunities that need exploration Multiple exit opportunities, friendly acquirers Analogy: flying an airplane….slower than a rocket, easier to change course

Timelines, Competition Also Key Variables

Some Opportunities Require Big Money Up Front

Taking on public company

Making a market

Need critical mass for audience

Large capital requirement to finish R&D, prove concept, build infrastructure

Analogy: launching a rocket…you get there fast! But aim correctly!

Others Are Better Done in Stages

Greenfield opportunity with barriers to entry

Multiple market opportunities that need exploration

Multiple exit opportunities, friendly acquirers

Analogy: flying an airplane….slower than a rocket, easier to change course

Example Investment: Carbonite Long-time friends of CEO All-star team, 5 th company Operational breakthrough on consumer backup Rapid initial adoption $2.6M 1 st Round, Oct ‘05 $3.5M 2 nd Round, Aug ’06 $15M 3 rd Round, Apr ‘07

Long-time friends of CEO

All-star team, 5 th company

Operational breakthrough on consumer backup

Rapid initial adoption

$2.6M 1 st Round, Oct ‘05

$3.5M 2 nd Round, Aug ’06

$15M 3 rd Round, Apr ‘07

Case Study: Sloan MBA & Co-Founder First-time CEO Closely ties to market Rapid initial adoption $1.1M 1 st Round, All Angels, June ‘06 $6.0M 2 nd Round, 2 VCs + Angels, June ’07

Sloan MBA & Co-Founder

First-time CEO

Closely ties to market

Rapid initial adoption

$1.1M 1 st Round, All Angels, June ‘06

$6.0M 2 nd Round, 2 VCs + Angels, June ’07